The Not-So-Great Game of Investing

The concept of “gamification,” a process in which gaming elements are applied to an activity to encourage engagement, can be a useful way to help people, especially young people, grasp a complex concept. For years, educators have used games to promote all kinds of learning, including how to save and invest money. The Young Investors Society, for example, teaches financial analysis through its Global Stock Pitch Competition, and encourages high-school students to learn about investing through its Dollar-a-Day Challenge. In 2017, the American Institute of CPAs introduced a game called “Yesterday’s Tomorrow” to help young people understand how their financial decisions might impact them later in life.

Financial literacy advocates haven’t been the only ones embracing gamification, though. Companies, including Bunchball and EY, have pointed out the benefits, and the growing fintech industry has helped make it easier than ever for profit-driven financial services firms to give clients an exciting online experience. Unfortunately, while gamification in the financial services industry can create a better user experience, it has also brought some unintended consequences during the COVID-19 pandemic.

Fun, Until It’s Not

When the coronavirus sent the stock market reeling in February and March, young people who had never invested before decided it was time to start. Why? Apparently, some thought they could buy into the market while it was declining and make money by riding the recovery. Others ­­— like many of us ­trapped at home during the pandemic ­­— were just bored and wanted to learn something new. Whatever the reason, companies like Acorn, Betterment and Robinhood saw the number of new investment accounts increase substantially in 2020 as amateur investors entered the market.

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Without foundational knowledge of investing, it’s easy for someone to get into trouble using an investing app that feels like a really fun game. In June, a user of the popular financial app Robinhood committed suicide when he thought he had lost more than $730,000 while trading options. After his death, Robinhood announced it was stepping up in-app education around options and changing some of its displays to improve the user experience.

That may not be enough, according to some who compare Robinhood users to gamblers trading risky products at a fast pace. In a blog on in March, Thomas Wong wrote that zero-commission trades can make it easier for someone to start day-trading on Robinhood, noting that commission fees can influence how investors manage risk. He compares Robinhood, which also offers fractional shares of companies, to fantasy sports gambling site Draft Kings.

A Safer Approach

Many investors get their start by purchasing individual stocks, and while that’s one way to learn about how the market works, I believe there’s a better way to learn while reducing unnecessary risk and positioning yourself for long-term success:

  1. Decide your goals. If you are young, you may not be thinking about retirement yet, but you should be thinking about investing long-term. The financial markets have rewarded long-term investors, providing growth of wealth that has more than offset inflation.
  2. Start early. Albert Einstein once called compound interest the eighth wonder of the world, adding, “He who understands it, earns it; he who doesn’t, pays it.” The younger you are when you start to save, the longer your money has an opportunity to grow. If you have a job that offers a defined contribution plan, such as a 401(k), consider contributing as much as you can, especially if your employer contributes a match. Otherwise, you’re leaving money on the table.
  3. Develop an investment strategy you can live with. This is where having a financial adviser can be especially useful. At AMDG Financial, we practice something called evidence-based investing, in which we consider your financial situation, your goals, and your tolerance for risk, and then apply what we know about the markets to create a portfolio tailored to your needs.
  4. Diversify your holdings. Instead of investing in individual stocks, consider investing in a basket of stocks, like a mutual fund or index fund. Holding securities across many market segments can help manage your overall risk. Global diversification can further broaden your investment universe.
  5. Don’t try to time the market. It’s impossible to predict which market segments will outperform in a given period, and you’ll drive yourself crazy if you try. The beauty of holding a globally diversified portfolio is that you are positioned to seek returns wherever they happen.
  6. Manage your emotions. Games are fun, and typically, they don’t carry any major consequences if you lose (unless you’re betting on the outcome). Investing is different. While it may seem fun to make a trade and watch the virtual confetti fall in your investing app, reacting to current market conditions may lead you to make poor investing decisions. If you think watching the news or reading the headlines can cause you to feel anxious or excited and ready to make a trade, recognize that you may be reacting emotionally, and remember your goals.
  7. Stay in your seat. Unlike day-traders, evidence-based investors don’t make trades often. That’s because they know that trading fees can erode their wealth. Instead, they focus on what they can control, staying disciplined through market dips and swings.

During a time when many people are still working from home and limiting their contact with others, boredom may tempt you to try something daring, and in many cases, that’s perfectly ok. But if you want to learn about investing, try shopping around for an adviser who will place your interests first rather than getting in over your head with an investing app. Your future self will thank you.

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